Why do stocks go up faster than inflation?

Answer 1

stock price has nothng to do with inflation. It reflects everything that is known about the company as well as expectations over the next six months.
Only when a companies performance is tied to inflation/deflation will it by proxy follow inflation, but only loosely.

Answer 2

This is a great question. It is often said that you have to invest in something that can outpace inflation. This is usually said to show a person that if inflation is running at 4% and you are only making 3.5% on a CD you are actually losing .5% in buying power every year that you are in this CD. This then leads into the discussion of how stocks have a long term track record of outpacing inflation. To be intellectually honest, all stocks do not outpace inflation. In fact some stocks lose money over time. Just think back to 1999 when Amazon, Yahoo, and Qualcom were all at $200 per share. There were a lot of people who were still buying those stocks at that time. If they are still holding on to those stocks today they would own Amazon and Yahoo at $28 a share and Qcom at $37 a share. So to just throw out there that stocks "go up" faster than inflation would be a generalization.

Now to address your question. Stocks would be considered a scarce asset because there is only a set amount of any one stock available at any one time. When a company first goes public they along with the investment bank helping them to go public decide how many shares of their stock they are going to put into the market. The investment bank does a lot of research to determine the highest dollar amount they can set on the stock that would result in all the shares being purchased. Once they have that amount determined they set the price and sell the shares on the open market as an IPO at that set price. Up to this point the pricing of the stock has been arbitrairlly determined. (They just pulled a number out of the air as their best estimate of the highest price that they could receive) Now that the stock is in the open market the price is now driven up or down purely by the laws of supply and demand. If I own the stock and I want to sell it, I can only reach a deal with a buyer if my asking price matches the price that he is willing to pay me. If someone is willing to pay me $30 per share but I am only willing to accept $35 a share then we don't have a deal. If for any reason (good news about the company, strong expectations, competitive advantage, etc) there are a lot of buyers out there competing against each other to purchase my stock, that drives the price up. If the situation is reversed (bad news, low expectations, competitive disadvantage, etc) then there would likely be less competition for my shares. If there is less competition and if I really want to sell it I would have to lower my asking price to entice more buyers.
I'm using personal examples here by referring to this as what happens when I'm trying to sell my stock but if you take this to more of a macro level where you have thousands of people owning the same stock and in the same situation you can see how the markets move up and down.
I hope that my long winded answer to your excellent question was helpful. Good luck

Answer 3

Stocks are a leading indicator of the financial health of the country. People who trade stocks are looking 6 months to 1 year into the future, so current news about inflation doesn't mean anything.

Answer 4

Stocks do not always go up faster than inflation. Stock price and inflation are not directly related.

Answer 5

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Answer 6

1

Answer 7

A very difficult question to answer. In general, over long periods of time this is true. Things would be very bad if this weren't the case... sorry I can't be more specific.

Answer 8

Read this

http://en.wikipedia.org/wiki/Inflation